FEMA warns over NFIP expiration

The Federal Emergency Management Agency (FEMA) warned over the consequences if the US congress fails to reauthorise the National Flood Insurance Program (NFIP) that will expire on July 31, 2018.

“Serious consequences will result if Congress fails to reauthorise the NFIP beyond July 31,” FEMA administrator Brock Long said. “Many individuals, families, businesses and local communities will find themselves left vulnerable to the devastating effects of flooding because the NFIP will be unable to issue new policies, renew existing policies, or increase coverage on existing policies. In addition, some real estate transactions will be affected. The Flood Disaster Protection Act of 1973 prohibits a federally-backed lender from making, increasing, extending, or renewing a federally-backed loan secured by property located in Special Flood Hazard Areas unless the property is covered by flood insurance. There would also be serious long-term consequences regarding floodplain management and mitigation activities and grant awards, and if needed, the NFIP would be unable to borrow from the US Treasury to pay claims for existing policies,” Long explained.

The FEMA administration supports reforms to the programme to ensure its long-term viability, the statement noted. As currently structured, the NFIP cannot handle catastrophic losses like those caused by the devastating hurricanes in 2017, it added.

FEMA first purchased reinsurance in 2017 and recovered $1.04 billion from the private markets due to losses from hurricane Harvey. In early January 2018, FEMA secured $1.46 billion in reinsurance from 28 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event occurring in the calendar year 2018. FEMA is now launching a cat bond to transfer risk from the NFIP to the capital markets through Flood Smart Re, a Bermuda-domiciled insurance vehicle. It would be the first catastrophe bond to transfer risk from the NFIP to the capital markets and it will reportedly seek $275 million of reinsurance protection.

FEMA and Congress have never failed to honour the flood insurance policies in place with NFIP policyholders, the statement said. Nevertheless, Long noted: “Let me reassure current NFIP policyholders that existing flood insurance policies would remain valid regardless of a lapse going into effect. If a lapse were to occur, policies that are in force before midnight on July 31, 2018, would remain in force. The NFIP would process and pay flood insurance claims from the National Flood Insurance Fund and the National Flood Insurance Reserve Fund during a lapse until these funds were depleted.”

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